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Would a Mouse Eat a Fox?

11.10.2017

The Walt Disney Co. and 21st Century Fox held earnings calls last week, but quarterly returns weren’t among the most pressing questions from analysts.

Most of all, Wall Street wondered aloud if the two iconic companies would merge. As deal speculation swirled around both media giants, executives seemed eager to highlight the success of their cable and content properties while acknowledging the changing landscape.

Fox stock surged nearly 15% after reports that it had held talks, since ended, to sell off its 20th Century Fox studio, cable networks FX and National Geographic Partners, and its 39% interest in European satellite TV company Sky to Disney. In that scenario, Fox would have kept Fox News Channel and Fox Business Network, and its regional sports networks, broadcast operation and TV stations.

On Fox’s fiscal first-quarter conference call, executives were quick to point to the success of their cable operations — revenue at the cable unit was up 10% in the period, and affiliate fees rose 11%. Fox said the gains were due to growth across the portfolio.

But despite that success, Fox left the door to any possible deals or divestitures slightly ajar.

“We told you many years ago that innovative disruption would come to our industry,” 21st Century Fox co-executive chair Lachlan Murdoch said on the call. “We moved early to jettison our thin brands and went deep with investments for our rich distinctive brands, when many market pundits were skeptical of this approach.”

Whether that means more “thin brand” paring is due or it was just an attempt to give analysts historical perspective is open to interpretation. But Fox was adamant it has the scale and the assets to execute on its strategy.

At Disney, which escalated the cord-cutting conversation two years ago when it revealed flagship sports network ESPN was losing subscribers, some evidence suggested that erosion may be slowing. On a conference call with analysts Nov. 9, Disney chair and CEO Bob Iger said subscriber losses at ESPN were “not as deep” as they had been in prior quarters, in part because of deals with new over-the-top service providers.

Disney’s fiscal fourth-quarter results were mixed. Iger pointed to two-week Nielsen data that showed when live consumption of sports includes streaming and OTT platforms, ratings rise 25% to 29%, an encouraging trend. But broadcast revenue was down 11% in the quarter, and cable revenue was flat.

While neither Disney nor Fox did much to totally squelch speculation, it appears that the lines drawn in the initial reports — that Disney was doubling down on content and Fox was throwing in the towel — are much more nuanced.

Iger said Disney’s focus is on monetizing high-quality programming, and though he conceded that “some improvement from a quality perspective would be helpful,” he also pointed to the company’s strong production and creative capabilities. Disney has a live-action Star Wars series in development as well as midseason shows that should attract audiences.

“Our intention as a company is to take advantage of opportunities that exist out there today for good television and to produce more of it,” Iger said.

That could point to a deal with Fox, or another programmer. FX is known for high-quality content, and Fox’s TV production studios have cranked out perennial hits like The Simpsons and Family Guy for its broadcast unit, as well as Modern Family for Disney’s ABC.

Deal Wouldn’t Be Disney Cure-AllBut not everyone was convinced that a Fox deal would solve Disney’s problems. BTIG media analyst Richard Greenfield, a staunch critic of Disney over the years, wrote in a blog post Nov. 7 that Disney should focus more on companies like Activision for gaming, Spotify for mobile subscriptions and Twitter “to capture the SportsCenter of the future.”

Sanford Bernstein media analyst Todd Juenger, another critic of the pay TV content model, said in a research note that “the chances of a Disney-Fox deal, as described, are very low.”